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Auditor Rotation

In: Business and Management

Submitted By sheens92
Words 5991
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I. Audit Quality
The primary role of accounting is to reduce information asymmetry by providing investors with relevant and reliable information in order to create an efficient allocation of resources. However, there is often a tradeoff between relevance and reliability that needs to be considered when imposing regulations (Scott, 2012). When information asymmetry is present, investor faith decreases, compromising the efficiency of the market. In order to prevent market failures, it is critical to maintain investor confidence; this can be done by achieving high audit quality.
Definition
The PCAOB defines audit quality as providing “independent and reliable audits” regarding management’s financial statements, internal controls and potential threat for going concerns (PCAOB, 2013). Four key aspects of audit quality include independence, objectivity, skepticism, and competence. Maintaining and improving the four elements is critical to increasing audit quality and the usefulness of the information provided.
Independence
According to the PCAOB Auditing Standards, auditors should maintain independent mental attitudes. Independence is defined by the AICPA Code of Professional Conduct as independence of both, mind and appearance. Independence of mind requires the auditor to act with integrity, free of outside influence whereas independence of appearance requires the avoidance of situations leading to potential conflict of interests. Unless, the auditor is truly independent, the credibility and the reliability of the financial statements are compromised, violating the key objective of accounting: providing investors with relevant and reliable information (Whittington, Rany, 2014).
Objectivity
The AICPA Code of Professional Conduct requires auditors to be objective meaning that auditors should maintain a position that is free of conflict of interests and potential…...

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